Fitch Affirms Horton's IDR At 'BB+'; Outlook To Positive

June 19, 2015 03:11 PM Eastern Daylight Time

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the ratings for D.R. Horton, Inc. (NYSE:
DHI), including the company's Issuer Default Rating (IDR) at 'BB+'. The
Rating Outlook has been revised to Positive from Stable. A complete list
of rating actions follows at the end of this release.

KEY RATING DRIVERS

The ratings for DHI reflect the company's successful execution of its
business model, steady capital structure, and geographic and product
line diversity. The company was an active consolidator in the
homebuilding industry in the past, but has been much less acquisitive
over the past 11 years. It appears the company will continue to be
focused principally on harvesting the opportunities within its current
and adjacent markets.

The ratings also reflect the company's relatively heavy speculative
building activity (at times averaging 50% - 60% of total inventory and
48% at March 31, 2015). Historically, the company built a significant
number of its homes on a speculative basis (i.e. begun construction
before an order was in hand). DHI successfully executed this strategy in
the past, including during the severe housing downturn. Nevertheless,
Fitch is somewhat more comfortable with the more moderate spec targets
of 2004 and 2005, when spec inventory accounted for roughly 35% - 40% of
homes under construction.

The Positive Outlook takes into account further moderate improvement in
the housing market in 2015 and 2016 and the potential for share gains by
DHI and hence volume outperformance relative to industry trends. The
Outlook also considers the company's above-average performance from
credit and operating perspectives during much of the past housing
downturn and especially so far in the recovery. In particular, leverage
should meaningfully improve in fiscal 2015 and 2016. DHI was one of the
few public builders profitable in 2010 and 2011, reporting solid profits
in 2012, 2013 and 2014, and should report stronger pretax and net income
this fiscal year. DHI was the second builder to reverse its substantial
federal deferred tax asset allowance (during FY 2012).

THE COMPANY

D.R. Horton was established in 1978 and completed its initial public
offering in 1992. DHI has grown quite rapidly since its beginnings. From
1978 to 1987 its activities were exclusively in the Dallas/Ft. Worth
area. The company has entered 82 markets since then through a
combination of 'greenfield' entries and acquisitions and subsequently
exited a few of the markets. Since 1978, DHI has made 21 acquisitions,
almost all of these during the 1994 - 2002 period.

DHI acquired the homebuilding operations of Breland Homes in August 2012
for $105.9 million in cash. Breland Homes operated in Huntsville and
Mobile in Alabama and along the gulf coast of Mississippi. In October
2013, the company acquired the homebuilding operations of Regent Homes,
Inc. for $34.5 million cash. Regent operated in Charlotte, Greensboro
and Winston-Salem, N.C. DHI acquired Crown Communities, the largest
builder in Atlanta, on May 9, 2014. The company acquired Crown
Communities, which also operates in South Carolina, for $209.6 million
in cash. In April 2015, DHI acquired Pacific Ridge Homes in Seattle,
Washington for $72 million in cash.

In calendar 2014, DHI was ranked the largest homebuilder in the U.S.
based on closings and revenues, holding the #1 position based on home
closings since 2002. The company has made only four relatively small
acquisitions since 2003 and it appears that DHI may remain less
acquisitive in the future as it focuses on harvesting the opportunities
within its current and adjacent markets. The company operates in 27
states and 79 markets in the U.S. and has 40 homebuilding operating
divisions.

GENERALLY IMPROVING HOUSING MARKET

Housing metrics increased in 2014 due to more robust economic growth
during the last three quarters of the year (prompted by improved
household net worth, industrial production and consumer spending), and
consequently acceleration in job growth (as unemployment rates decreased
to 6.2% for 2014 from an average of 7.4% in 2013), despite modestly
higher interest rates, as well as more measured home price inflation. A
combination of tax increases and spending cuts in 2013 shaved about
1.5pp off annual economic growth, according to the Congressional Budget
Office. Many forecasters estimate the fiscal drag in 2014 was only about
0.25%.

Single-family starts in 2014 improved 4.8% to 648,000 as multifamily
volume grew 15.6% to 355,000. Thus, total starts in 2014 were 1.003
million. New home sales were up a modest 1.6% to 436,000, while existing
home volume was off 2.9% to 4.940 million largely due to fewer
distressed homes for sale and limited inventory.

New home price inflation moderated in 2014, at least partially because
of higher interest rates and buyer resistance. Average new home prices
rose 6.4% in 2014, while median home prices advanced approximately 5.4%.

Housing activity is likely to ratchet up more sharply in 2015 with the
support of a steadily growing, relatively robust economy throughout the
balance of the year. Considerably lower oil prices should restrain
inflation and leave American consumers with more money to spend. The
unemployment rate should continue to move lower (5.3% in 2015). Credit
standards should steadily, moderately ease throughout 2015. Demographics
should be more of a positive catalyst. More of those younger adults who
have been living at home should find jobs and these 25 - 35-year-olds
should provide some incremental elevation to the rental and starter home
markets.

Single-family starts are forecast to rise about 17.3% to 760,000 in 2015
as multifamily volume expands about 7% to 381,000. Total starts would be
in excess of 1.1 million. New home sales are projected to increase 18%
to 515,000. Existing home volume is expected to approximate 5.152
million, up 4.3%.

New home price inflation should further taper off with higher interest
rates and the mix of sales shifting more to first time homebuyer
product. Average and median home prices should increase 3.0%-3.5%.

As Fitch noted in the past, the housing recovery will likely occur in
fits and starts.

SOME EROSION IN HOME AFFORDABILITY

The Freddie Mac 30-year average mortgage rate (June 18, 2015) was 4.00%,
down 4 basis points (bps) sequentially from the previous week and 59 bps
higher than the average rate during the month of January 2013 (3.41%), a
low point for mortgage rates. Current rates are still below historical
averages and help moderate the effect of much higher home prices during
the past few years. Income growth has been (and may continue to be)
relatively modest.

Nevertheless, there has been some lessening of affordability as the
upcycle in housing has matured. The Realtor Association's composite
affordability index peaked at 207.3 in the first quarter of 2012,
averaged 176.9 in 2013, 164.4 in 2014 and was 164.9 in April 2015.

Erosion in affordability is likely to continue as interest rates likely
head higher in 2015 (as the economy strengthens). Fitch projects that
mortgage rates will average 20 - 30 bps higher in 2015. Home price
inflation should moderate this year reflecting the higher interest rates
and the mix of sales shifting more to first time homebuyer product.
However, average and median home prices should still rise within a range
of 3.0% - 3.5% this year, pressuring affordability.

FINANCIALS

DHI successfully managed its balance sheet during the housing downturn
and generated significant operating cash flow. DHI aggressively reduced
its debt during the downturn and early in the recovery. Homebuilding
debt declined from roughly $5.5 billion at June 30, 2006 to $1.58
billion as of Dec. 31, 2011, a 71% reduction.

More recently, DHI has been responding to the stronger housing market,
expanding inventories and increasing leverage. Homebuilding debt at the
end of the fiscal 2015 second quarter was $3.55 billion.

As of March 31, 2015, debt/capitalization was 39.6%. Net
debt/capitalization was 34.7% at the end of fiscal 2015 second quarter.
Debt-to-EBITDA has improved from 5.7x at Sept. 30, 2012 to 4.0x at Sept.
30, 2013, 3.3x at Sept. 30, 2014 and 3.2x at March 31, 2015. Funds from
operations (FFO) adjusted leverage was 6.6x at the end of fiscal 2012
and is currently 5.0x. Interest coverage rose from 3.35x at the end of
fiscal 2012 to 4.75x in 2013, 5.4x at the conclusion of 2014 and 6.55x
at the end of the fiscal 2015 second quarter. Fitch projects that
debt-to-EBITDA should approximate 2.8x by the end of 2015 and be below
2.5x by the conclusion of 2016. Fitch also projects that at the end of
2015 interest coverage should come close to 7.5x.

DHI has solid liquidity with unrestricted homebuilding cash and
equivalents of $665.8 million as of March 31, 2015.

The company has a $975 million senior unsecured revolving credit
facility with an uncommitted accordion feature that could increase the
size of the facility to $1.25 billion, subject to certain conditions and
availability of additional bank commitments. The facility also provides
for the issuance of letters of credit with a sublimit equal to
approximately 50% of the revolving credit commitment. Letters of credit
issued under the facility reduce available borrowing capacity. The
maturity date of the facility is Sept. 7, 2019. At March 31, 2015, there
were $175 million of borrowings outstanding and $90.3 million of letters
of credit issued under the revolving credit facility.

DHI continues to have access to capital markets. In February 2015, the
company priced an offering of $500 million aggregate principal amount of
4.0% senior notes due Feb. 15, 2020.

DHI has well laddered debt with $542.6 million of senior notes maturing
in 2016 and $350.0 million due in 2017.

In early December 2012, DHI declared a cash dividend of $0.15 per share.
This dividend was in lieu of and accelerated the payment of all
quarterly dividends that the company would have otherwise paid in
calendar 2013. DHI resumed its normal quarterly cash dividends in
calendar 2014.

REAL ESTATE

DHI spent $2.31 billion on real estate in 2014- 60% on land and 40% on
development. The company expended $2 billion on land/lots in 2013 and
spent about $640 million on development activities. DHI purchased $1.1
billion of land and lots in 2012 and spent approximately $300 million on
land development. The company spent $790 million on land and development
activities in 2011, and about $830 million during 2010, compared with
$380 million paid in 2009. During the peak of the housing cycle, DHI
spent $5.2 billion annually.

Through the first half of fiscal 2015, the company committed roughly
$1.07 billion for real estate activities (55% on land and 45% on
development). Fitch expects that land and development spending will
approximate $2.35 billion for full-year fiscal 2015 - almost 60% for
land and lots and 40% for development activities.

DHI maintains a 5.4-year supply of lots (based on LTM deliveries), 68.7%
of which are owned and the balance controlled through options. The
options share of total lots controlled is down sharply over the past
seven years as the company has written off substantial numbers of
options and land owners are less inclined to use options. Fitch expects
DHI to continue replenishing its land position and moderately increasing
its community count. The primary focus will be optioning (or in some
cases, purchasing for cash) or developing finished lots in relatively
small phases, wherein DHI can get a faster return of its capital.

DHI's cash flow from operations during fiscal 2014 (ended Sept. 30,
2014) was a negative $661.4 million. In fiscal 2015, Fitch expects DHI
to be slightly cash flow positive as spending on land and development
activities levels out.

The ratings also reflect DHI's relatively heavy speculative building
activity (at times averaging 50% - 60% of total inventory and 48% at
March 31, 2015). DHI has historically built a significant number of its
homes on a speculative basis (i.e. begun construction before an order
was in hand).

A key focus is on selling these homes either before construction is
completed or certainly before a completed spec has aged more than a few
months. This has resulted in consistently attractive margins. DHI
successfully executed this strategy in the past, including during the
severe housing downturn. Nevertheless, Fitch is generally more
comfortable with the more moderate spec targets of 2004 and 2005, when
spec inventory accounted for roughly 35% - 40% of homes under
construction.

--Industry single-family housing starts improve about 17%, while new and
existing home sales grow 18% and almost 4.5%, respectively, in 2015;

--DHI's revenues increase at a 30% pace, but homebuilding EBITDA margins
erode one percentage point this year, due to higher expenses (especially
labor and material costs) and lesser home price inflation;

--DHI spends approximately $2.3 billion on land acquisitions and
development activities this year;

--The company maintains an adequate liquidity position (well above $350
million) with a combination of unrestricted cash and revolver
availability.

RATING SENSITIVITIES

Future ratings and Outlooks will be influenced by broad housing market
trends as well as company-specific activity, such as:

--Trends in land and development spending;

--General inventory levels;

--Speculative inventory activity (including the impact of high
cancellation rates on such activity);

--Gross and net new order activity;

--Debt levels;

--Free cash flow trends and uses;

--DHI's cash position.

Fitch would consider taking further positive rating actions if the
recovery in housing persists or accelerates and DHI shows steady
improvement in credit metrics (such as debt-to-EBITDA leverage
approaching 2x), while maintaining a healthy liquidity position (in
excess of $1 billion in a combination of cash and revolver
availability). Fitch would expect management to exercise discipline in
managing its land and liquidity through the balance of the cycle.

Conversely, negative rating actions could occur if the recovery in
housing dissipates and DHI maintains an overly aggressive land and
development spending program. This could lead to sharp declines in
profitability, consistent and significant negative quarterly cash flow
from operations, and meaningfully diminished liquidity position (below
$500 million).

LIQUIDITY

FULL LIST OF RATING ACTIONS

Fitch has affirmed the following ratings and assigned the following
Recovery Rating for D.R. Horton, Inc. (NYSE: DHI)

--Long-term IDR at'BB+';

--Senior unsecured debt at 'BB+/RR4'

The Rating Outlook is Positive.

In accordance with Fitch's updated Recovery Rating (RR) methodology,
Fitch is now providing RRs to issuers with IDRs in the 'BB' category.
The Recovery Rating of '4' for D.R. Horton's unsecured debt supports a
rating of 'BB+', and reflects average recovery prospects in a distressed
scenario.

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